Stamps.com Inc.
Q1 2016 Earnings Call Transcript

Published: 10 May 2016

[Operator:]

Good day, ladies and gentlemen and welcome to First Quarter 2016 Stamps.com Financial Results Call. [Operator Instructions] As a reminder, this conference maybe recorded. I would like to introduce your host for today’s conference, Mr. Jeff Carberry, Vice President of Finance. Sir, you may now begin.

[Jeff Carberry:]

Thanks very much and good afternoon everyone. On the call today is Ken McBride, CEO and Kyle Huebner, CFO. The agenda for today’s call is as follows. We will review the results of our first quarter 2016 then we will discuss financial results and talk about our business outlook. But first, the Safe Harbor statement, Safe Harbor statement under the Private Securities Litigation Reform Act of 1995, this release includes forward-looking statements about our anticipated financial metrics and results, all of which involve risks and uncertainties. Important factors, including the company’s ability to successfully integrate and realize the benefits of its past or future strategic acquisitions or investments, including the company’s ability to complete and ship its products, maintain desirable economics for its products and obtain or maintain regulatory approval, which could cause actual results to differ materially from those in the forward-looking statements, are detailed in filings with the Securities and Exchange Commission made from time-to-time by Stamps.com, including its annual report on Form 10-K for the fiscal year ended December 31, 2015, quarterly reports on Form 10-Q and the current reports on Form 8-K. Stamps.com undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. As a reminder, the financial results, including income and adjusted EBITDA measures we discussed on the call, are on a non-GAAP basis and exclude the following first quarter 2016 items

[Ken McBride:]

Thanks, Jeff. Thank you for joining us. Today, we announced record quarterly financial results and metrics. Record total revenue was $81.8 million that was up 86% year-over-year. The non-GAAP adjusted EBITDA was $34.8 million that was up 161% year-over-year. The non-GAAP earnings per share was $1.72 and that was up 139% year-over-year. Paid customers hit a record level as well at $649,000, that was up 17% year-over-year. ARPU, average revenue per customer, up $40.65 and that was up 58% year-over-year. And we hit a record total postage printed of $1.2 billion and that was up 122% year-over-year. We are extremely pleased with the results of the quarter. As a result of the strong first quarter performance and our current outlook for the business, we increased our revenue and our earnings guidance today. So, let me begin with a more detailed discussion of the Mailing and Shipping business. Mailing and Shipping revenue was 79.2% in the quarter that was up 84% compared to the first quarter of 2015. Mailing and Shipping revenue includes the service of the product and insurance revenue. Mailing and Shipping revenue growth was driven by both growth in the paid customers and also growth in the ARPU or the average revenue per customer. Paid customers in the first quarter were 649,000 and that was up 17% versus the first quarter of 2015. Growth in the paid customers was driven by continued success in our sales and our marketing and success in our customer retention across all of our businesses. Also, we began including Endicia’s paid customers during the fourth quarter last year. So, those are now part of our overall paid customer metrics going forward. Total USPS postage printed through our solutions was $1.2 billion in the first quarter, which was up 122% versus the first quarter of 2015. Last year, Stamps.com, along with all of its subsidiaries, represented an estimated one-third of all USPS domestic priority mail, which is the primary package service of the U.S. Postal Service. Additionally, during 2015, the combined companies processed over 1 billion packages. Average monthly revenue per paid customer, or ARPU, was $40.65 in the first quarter and that was up 58% versus the first quarter of 2015. The growth in ARPU benefited from continued growth in the shipping business, including positive contributions from the traditional high volume shipping area as well as from all of our acquisitions, Endicia, ShipStation and ShipWorks. Specifically, the growth in ARPU has been driven by the higher ARPU typically associated with higher volume shippers. All three of our acquisitions ShipStation, ShipWorks and Endicia have higher ARPU than our historical average. And also, ARPU is now directly correlated with the postage growth owing to the various ways we are now able to monetize the postage volume. We are pleased with our financial performance and the strength of our business metrics during the first quarter. With that, let me now provide some updates on Endicia. Even though, we are only 6 months or less than 6 months into the integration process, we are very pleased with the progress we have made so far and we feel that we are already starting to see the benefits of the acquisition in our first quarter financial results. We have centralized our marketing efforts and gain scale of economies and efficiencies in the marketing spend we do against each of our brands. We have combined our sales teams and are aligning the combined team around the corporate goals, including selling all of our brands into the various customer segments to which we target them. We have achieved cost reductions by eliminating duplicate efforts across the organizations. Across utilizing the expertise we have in our respective development teams to enhance our combined innovation, we have taken steps to optimize our customer service through increased scale in the broader geographic diversity across combined organizations. And we have realized cost savings by centralizing the purchasing of products and services from various vendors. Very happy with the progress we have made to-date and we are excited about continuing with our efforts to integrate Endicia with all of our other businesses. Now, let’s discuss some of the broad initiatives we are working on in our Mailing and Shipping business. First, with the strong returns, we continue to see from our marketing programs, we are continuing to increase and optimize our overall marketing spend. We continue to see a great return on investment in all of our channels that we have used historically, including direct mail and traditional media, radio, television, affiliates, partners, search engine, marketing and other online advertising. We have also now expended the focus of our marketing efforts to encompass our other brands, ShipStation, ShipWorks and Endicia. The results in our efforts have been very positive so far. Second, we plan to continue to ramp and optimize our sales efforts across all of our brands. We have combined our two national sales teams and are leveraging the newly aligned team to drive all the solutions we now offer across our brands. Previously, the separate sales teams had a single brand and a single set of products. Each customer is unique and may need a particular feature or set of features that only one or a few of the products may have. This makes the sales process more efficient when there are more products in their portfolio of solutions. Third, we plan to enhance our multi-carrier solutions, ShipStation and ShipWorks. These platforms offer great solutions for high-volume shippers such as warehouses, fulfillment houses and e-commerce shippers, larger retailers and other types of high volume shippers that may need more than just a U.S. Postal Service solution. ShipStation and ShipWorks solutions together now have well over 100 integrations with marketplaces, e-commerce tools, shopping carts and other solutions that customers want and need. Additionally, we have continued to build out new features in those products such as inventory support, mobile solutions, support for additional USPS features and new carriers and new partners. As mentioned before, we also continue to grow our multi-carrier solutions by leveraging our marketing efforts. Fourth, we plan to continue to enhance our shipping solutions. We continue to attract the high-volume shippers, such as warehouses, fulfillment houses, e-commerce, large retailers and other types of high volume shippers and we plan to continue to optimize the business in this area. We plan to continue enhancing the technology and the software to further improve the scalability of the solutions. We plan to continue introducing new features and functionality that will improve the value proposition of the solutions. We plan to continue adding new integrations for easier data export and import from the tools that customers like to use. And then finally, we plan to continue enhance the enterprise sales and marketing efforts. The solution continues to present a strong customer value proposition compared to postage meters, including the lower total cost of ownership greater visibility into individual employee activity and our web-based financial and administrative controls. We plan to continue increasing, optimizing and refining our enterprise customer lead generation and our sales to marketing efforts and continue to working on improving the efficiency of our sales team in that area. With that, let me hand the call over to Kyle for more detailed discussion of the financial results.

[Kyle Huebner:]

Thanks Ken. We will now review our first quarter financial results. As Jeff described, we will discuss our results on a non-GAAP basis and reconciliation of non-GAAP to GAAP can be found in our earnings release and past 8-K filings. Total revenue was $81.8 million in Q1, up 86% versus the first quarter of 2015. We achieved strong growth in both our Mailing and Shipping and our customized postage businesses. Mailing and Shipping revenue was $79.2 million, up 84% versus the first quarter of 2015. Mailing and Shipping revenue growth was driven by a 17% year-over-year increase in paid customers and a 58% year-over-year increase in ARPU. Mailing and Shipping gross margin was 84.8% in Q1 versus 80.0% in the first quarter of 2015. The increase in gross margin was primarily attributable to economies of scale associated with our strong revenue growth. Customized Postage revenue was up – was $2.6 million in Q1, up 167% versus the first quarter of 2015. Customized Postage revenue growth benefited from the inclusion of Endicia’s Picture Postage revenue as well as growth in high volume PhotoStamps business orders. Customized Postage gross margin was 17.9% in Q1 versus 16.2% in the first quarter of 2015. The increase in gross margin was primarily attributable to PictureItPostage, which has a higher mix of higher gross margin consumer orders as compared to PhotoStamps, which has a higher mix of lower gross margin high volume business orders. We experienced year-over-year increases in our first quarter cost of sales and marketing, R&D and G&A, primarily related to our acquisitions and our investments to support the growth in all of our Mailing and Shipping business. However, these costs as a percentage of revenue have all declined or remained flat as we have scaled our business. Sales and marketing spend was $19.7 million in Q1, up 48% versus the first quarter of 2015. Sales and marketing as a percent of revenue was 24.0% in Q1 compared to 30.2% in Q1 ‘15. R&D spend was $7.0 million and up 87% versus the first quarter of 2015. R&D as a percent of revenue was 8.5% in Q1 compared to 8.5% in Q1 2015. G&A spend was $7.4 million in Q1, up 45% versus the first quarter of 2015. G&A as a percent of revenue is 9.0% in Q1 compared to 11.6% in Q1 2015. Thus non-GAAP operating income was $33.6 million in Q1, up 170% versus the first quarter of 2015. Non-GAAP operating margin was 41.1% in Q1 compared to 28.3% in Q1 2015. Adjusted EBITDA was $34.8 million in Q1, up 161% versus the first quarter of 2015. Adjusted EBITDA margin was 42.5% in Q1 compared to 30.3% in Q1 2015. Our non-GAAP cash tax expense was $0.8 million in Q1. We have a $50 million deferred tax asset on the balance sheet as of March 31 that we expect to be able to use to reduce our cash taxes in future periods. Non-GAAP net income was $32.0 million, up 163% versus the first quarter of 2015. Non-GAAP net margin was 39.1% in Q1 compared to 27.7% in Q1 2015. Non-GAAP net income per fully diluted share was $1.72 in Q1, up 139% versus $0.72 per share in the first quarter of 2015. Fully diluted shares used in the EPS calculation was 18.7 million for Q1. Capital expenditures for the business was approximately $0.2 million in Q1. Our primary capital expenditures are investments in our technology platform to ensure the reliability and scalability of our solutions to handle the large postage volumes we are processing. Cash and debt and uses of cash, we ended Q1 with $121 million in cash and investments, which was up $46 million compared with $75 million at the end of Q4 2015. Free cash flow generated by the business was approximately $32.8 million in Q1. Free cash flow is calculated as non-GAAP net income plus D&A contained in operating expenses, less capital expenditures related to the business. We made a required debt payment of $1 million in Q1, resulting in debt outstanding under our credit agreement of $162.4 million, as of March 31, 2016. Total debt on our balance sheet net of $1 million – $1.75 million unamortized debt issuance cost was $160.7 million at the end of Q1. The interest rate on the debt at the end of Q1 was approximately 2.1%. As a result of our strong free cash flow and significant increase in our cash balance during the first quarter, on May 6, 2016, the Board of Directors elected to make an optional principal repayment of $10 million against the debt under the credit agreement. On February 22, 2016, the Board of Directors had approved a share repurchase program that authorized the company to repurchase up to $20 million of shares of stock through August 2016. During the first quarter of 2016, the company repurchased approximately 30,000 shares at a total cost of approximately $3.4 million. Also as a result of our strong free cash flow and significant increase in our cash balance, on the same May 6, 2016, Board meeting, the Board of Directors approved an amendment to the existing share repurchase program that authorized the company to repurchase up to $30 million, representing an increase of $10 million compared to the original authorization of stock through August 2016. Now turning to guidance, we expect fiscal 2016 revenue to be in the range between $310 million to $330 million. This compares to previous guidance of $290 million to $310 million. We expect 2016 revenue to continue to be driven by growth in our Mailing and Shipping business as customized postage accounts for less than 5% of revenue. We expect fiscal 2016 non-GAAP EPS to be in the range between $6 to $6.50 per diluted share. This compares to previous guidance of $5 to $5.50 per diluted share. Non-GAAP EPS excludes certain non-cash items such as stock-based compensation expense, amortization of acquired intangibles and capitalized debt issuance cost and non-cash income tax adjustments and certain non-recurring expenses such as acquisition and integration-related expenses. We expect sales and marketing, R&D and G&A to be up in 2016 compared to 2015 as we continue to invest in the business and we will have a full year of Endicia results. We expect interest rate on our debt to be approximately 2% to 3% in 2016. The interest rate is based on LIBOR and certain financial measures and this could fluctuate from quarter-to-quarter. We are including interest expense incurred under the credit agreement in our non-GAAP EPS guidance, but are excluding our non-cash amortization of the debt issuance costs. We expect cash taxes will be approximately 3% of non-GAAP pre-tax income for 2016. It is difficult to predict how long our deferred tax asset will last in terms of shielding us from becoming a full cash taxpayer. However, based on Q1 federal taxable income and our remaining NOLs and tax credits as of March 31, 2016, we expect that we will not have to pay full cash taxes for at least 1 to 2 years from now. We expect fully diluted shares will be approximately $19 million to $19.5 million in 2016. We expect capital expenditures for the business in 2016 to be approximately $5 million. These investments are a function of the timing of ongoing projects throughout the year. So, we would expect to see fluctuations in our quarter-to-quarter spending. With our increased focus on shipping, we expect our revenue and financial results to exhibit more pronounced seasonality as compared to past years. In particular, we expect the second and third quarters to be meaningfully slower than the fourth and first quarters due to shipping seasonality patterns. As such, we would not expect the second quarter 2016 to achieve the same results as the first quarter of 2016. Summary, we have achieved the significant transformation of our business over the past few years with our acquisitions and our focus on shipping. Our Mailing and Shipping business model with recurring revenue and high gross margins is a very attractive and sustainable business model. We are experiencing accelerating revenue and income growth and significant margin expansion demonstrating the strength of our financial model. We are very well positioned to capitalize on the growth in the e-commerce and high volume shipping segments. E-commerce driven packages are the fastest growing segment of the Mailing and Shipping market. We have already realized significant benefits of our ShipStation and ShipWorks acquisition in combination with our Stamps.com shipping efforts. Our Endicia acquisition is helping us further capitalize on our success in these opportunities. We have a strong return on investment in our Mailing and Shipping business, where the customers have high expected lifetime values relative to the cost of acquiring them. We have strong free cash flow generated by the business and we look forward to continuing to deliver great results. And with that, we will open it up for questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Kevin Liu with B. Riley & Co. Your line is now open.

[Kevin Liu:]

Hi, good afternoon.

[Ken McBride:]

Good afternoon, Kevin.

[Kevin Liu:]

You talked a lot about the great operations of Endicia today. Have we already seen a full quarters’ worth of cost synergies or should we see a further improvement in the second quarter? And then what else do you hope to accomplish integration wise over the course of the year that could contribute better numbers in the quarters ahead?

[Ken McBride:]

We are having a little problem hearing you, but I think you are asking about Endicia and the progress so far. So, yes, I mean I think we are a little bit more than 5 months is all into the integration process and obviously, very large organization and it’s going to take some time to realize the benefits. And I think we are really pleased with how well it’s gone so far. And I think you see some reflection in our first quarter financial results. Lot of the efficiencies we have gained through like the marketing and the sales, the cost reductions from being able to have our development teams work closely together, the customer service organizations and really the ability to centralize all the purchases that we are doing from a lot of the same vendors. So, I mean I think we just have begun the process. Like I said – like I said, it’s a really early in the process. So, I think we are excited to continue the efforts with Endicia and the integration with them and with us as well as all our businesses.

[Kevin Liu:]

Got it. And sorry for all the background noise, my next question which is on the competitive landscape, there has been a lot of noise since you last reported. Obviously, your guidance suggests you don’t have any real concerns there. I am still wondering if you could speak what advantages you have over newer entrants like Shippo and Pitney and what you feel you are – and how confident you feel about your ability to sustain the growth you have seen today?

[Ken McBride:]

Sure. So, I guess I would like to just start with the first one, which is Pitney. Obviously, we have known Pitney for 17 years we have been competing. And I think we understand them extremely well. They have been – I think what they are really doing is trying to compete more effectively in the market. We have been successful for several years now. The product they announced specifically SendPro, it’s really when you take a look at it, it’s really targeted at really low volume customers. And in the press release and you look it on the website, it appears to really be targeted to primarily to office mailers who need some shipping incidentally. But the product lacks a lot of features that you would expect in these high volume features. Batch processing is a key for higher volume e-commerce users being able to pull up all your packages in a single interface and process with one click, hundreds or thousands of labels all at one time is a key feature for these larger volume e-commerce. It doesn’t have that. You basically have to do one package at a time. Integrations we have with over 350 partnerships, marketplaces, e-commerce tools like shopping carts. Those things are critical for the customers we serve. That product doesn’t have any of that. And so I think never discount your competitors, but we definitely view that product as not something that we see as highly competitive at this point. I think if you look at that announcement where they announced that product as well as a bunch of others, they put out 7 press releases the same day and they re-branded a bunch of existing products under a new umbrella. I think they call it, commerce cloud. And you look at what’s underneath that umbrella the vast majority of those products are things that have been around for quite some time. So, I think that we are – like I said, we are continuing to – we don’t underestimate competitors like Pitney Bowes, but we do know them pretty well. And the particular announcements they made weren’t really viewed as something that’s very competitive with what we have now. And second thing I guess you asked was about the newer entrants the Shippo announcement. And I think also in the case of Shippo, they been a partner of ours since 2014. So, Endicia has been providing their solution since 2014. So, we understand them very well. We understand their business and their strategies and their weaknesses. So, I think it’s basically – it’s a multi-carrier API, so like an ability for a customer to write really code. So, it’s not an AUI to speak of, it’s an API. So, you have to write code around it in order to use it. They do have some limited APIs, but they are really kind of very early. And so when you look at their solutions, it’s not something most of our customers would really be interested in. Our customers need a far more sophisticated solution. Most of them don’t want to spend the time doing all the programming around that solution. And so I think that when you look at that – also when you look at the size of that business, they have talked about shipping millions of packages for thousands of customers and you to take a look at last year we did $1 billion packages. I think it’s again, don’t never underestimate your major competitor. But we at this point we don’t really – we didn’t really see it as a competitive threat.

[Kevin Liu:]

Okay. Thank you for taking the question and congrats on another strong quarter.

[Ken McBride:]

Thanks Kevin.

[Kyle Huebner:]

Thanks Kevin.

[Operator:]

Our next question comes from the line of George Sutton with Craig-Hallum. Your line is now open.

[George Sutton:]

I like that, George Sutton. Tremendous results, guys, I wanted to focus on the areas that are well different than our model and probably the most significant would be ARPU, could we talk about what is driving that ARPU so significantly this quarter, how much of that is driven by the correlation with postage growth as you talked about?

[Kyle Huebner:]

Yes. So we talked about it in the past George, that in ARPU world our traditional small business office space business is more of the flat rate subscription monthly costs. So as volume increases in that space, you really don’t get the benefit as opposed to the shipping world, in the shipping business where the increase in volume translates to a higher ARPU because you have the ability to monetize the volume. And so I think, there is a couple of factors. One, is that we have the first full quarter of Endicia customers and Endicia customers have significantly higher ARPUs in the shipping world than on Stamps shipping customers. So we definitely benefited from Endicia’s high volume shipping customers. I think we also just are seeing significant growth in the postage printed from all our shipping ShipStation, ShipWorks Stamps shipping solutions. So when you look at it, we now have four companies with shipping focus solutions where we are seeing significant postage printed growth, it was up 122%. And so that translates to growth in the ARPU, year-over-year growth in the ARPU to a greater degree than we have seen historically when we had less of a shipping focus.

[George Sutton:]

Okay, I appreciate that. And the significant delta relative to expenses for us was on the marketing line and you mentioned centralizing the efforts with Endicia, can you give us a sense of how much of that was driven by the centralized marketing versus any other changes that you made on that line item?

[Ken McBride:]

I think we just – we continue to find ways to bring in – I mean this is really the first quarter where we have began – begun to bring two marketing efforts together and find several areas where we are doing parallel activities. And thus by combining the activities, we can gain efficiencies. And so I think that there is a significant factor in terms of our initial synergies that we have already been able to realize with the two brands coming together. I think that when we originally talked about the deal, we talked about the significant sales efforts and size of the team that Endicia had and the significant spend and the approach we took to marketing. And so we really already hone those and got in a lot of benefits out of the centralizing the marketing, centralizing the sales under a single team. And so I think, the growth in the paid customers combined with the reduced sales and marketing line were both factors in that.

[Kyle Huebner:]

And I would add that, I think we are seeing the dynamic whereby having a sales and marketing spend that you can then leverage across four different offerings, ShipStation, ShipWorks, Stamps and Endicia, for the same amount of spend, you get an enhanced ROI. And so it enables you to leverage that spend and maybe not have to spend as much as you otherwise would have if you are just offering one product or solution on the markup.

[George Sutton:]

Okay, great. Last thing for me, you – I believe Ken, in your prepared remarks you mentioned one of the big benefits this quarter was improvement in retention and you are not giving churn anymore, but I wondered if you could talk quantitatively or qualitatively about what you were seeing from a retention perspective?

[Ken McBride:]

Sure. Yes. I think we – last quarter we talked about how with such a broad swap of businesses we now have very tiny customers that are just paying transaction fees to gigantic shippers that are shipping millions of dollars a month. So it’s just hard to talk about churn across a base that where you have that much diversity. It’s just kind of a misleading number. So we just really didn’t feel it was a number that continue to make sense. That being said, we do look at different areas of the business and we haven’t really seen a change in our retention of customers and continuing to see growth as you have seen. I think you see that reflected in the numbers on the growth in the revenue, the growth in the paid customers. So I think we are happy with the success we have seen in the sales and marketing area across all the brands. And I think you can’t grow customers 17% year-over-year without being able to retain them as well.

[George Sutton:]

Absolutely. Thanks a lot guys.

[Ken McBride:]

Thanks.

[Operator:]

Our next question comes from the line of Allen Klee with Sidoti. Your line is now open.

[Allen Klee:]

Yes. Hi, can you help us understand simplistically, kind of the difference between what you do an e-postage and if you see like, if more e-postage type companies come up, if that matters?

[Ken McBride:]

Sure. I mean, first thing I should mention is this is not really a new thing. e-postage is just a e-branding – a re-branding of something that the postal services had since 2005, which is called electronic verification system and that’s really a solution they developed for what I would call, bulk shippers. And so it’s something we have been around for more than a decade. So historically, what you have really seen is this is a solution that it’s targeted at really large enterprises, it requires significant amount of capital to do the initial and the ongoing development. So you see as companies like Amazon.com, or eBay or Etsy have adopted that, it’s something that they can adopt given the scale of those operations. But for smaller businesses, it’s really an API that you have to build a lot of software around. Things that we provide, more of a turnkey fashion, a significant amount of the effort has to go into building all the extra pieces in order to make that solution work. So there is things like cleansing the address, rating the rates, generating the labels, doing the account management, processing the payments. So there is just a lot of work that you have to do around that. So when we look at our customer base, the over 600,000 customers we have, we just don’t see that as an applicable solution because those customers really need, they need a much more feature-rich UIs that’s more plug and play. They don’t want to spend the time to spend $1 million or several million dollars in six months developing software just so that they can have something that’s works but doesn’t work better than our solution. So I think e-postage is, it’s really just a re-branded bulk shipping solution really designed for the very high volume customers.

[Allen Klee:]

Okay. And my last question is if we went back a few years we used to focus on kind of how the small home office was doing with the small business consumer optimism index. And I don’t know does that matter anymore or how would you prioritize that and kind of what you are thinking about?

[Ken McBride:]

Yes. I mean I think all the businesses matter. They are all significant businesses and contributing to the growth across the board. I think that we continue to have a significant – a huge number of those customers. We still have a huge value proposition for those when we look at the small office, home office, they are more primarily mailers, but they still see the same value propositions, we’ve always talked about. And we are still doing a lot of the same programs to acquire those customers and it still generates a lot of profit for us. So it’s a very significant business. And I think as the focus has shifted more and more to shipping, we have talked about that more just because it’s more a newer part of the story, but the SOHO business is still there and very much a critical part of the company.

[Allen Klee:]

Thank you.

[Operator:]

Our next question comes from the line of Robert Maltbie with Singular Research. Your line is now open.

[Debra Fiakas:]

Thank you. And this is Debra in for Robert. I appreciate you taking our questions. I wanted to go back to the topic off retention and ask you if you saw any differences in retention amongst your bands say, the Endicia customers versus the historic of Stamps.com customers or the ShipStation customers?

[Ken McBride:]

I wouldn’t say there is anything meaningful there, no.

[Debra Fiakas:]

Okay, very good. So – would you say that it’s – I am sorry, go ahead.

[Ken McBride:]

Go ahead. That’s the short answer is no.

[Debra Fiakas:]

Okay, very good. And I just wondered are you attributing your retention success to say, some of your new sales and marketing efforts, I mean what would you hang your hat on in terms of why the retention has improved?

[Kyle Huebner:]

I think, when you look at retention, it’s really differs by the different types of customers. And so this is one of the reasons that an aggregate churn number doesn’t really make sense because take a small business office, it’s not a critical part of their operations. They are really driven by how much they mail and ship, their trips to the post office, but it’s not a critical function, whereas wherein you look at shipping, that’s a critical, mission critical part of their operation. And so when you have a company, an e-commerce merchant that is shipping everyday and it’s a critical part of their business, then you see our churn rates compared to a small business where it’s an occasional usage that they can substitute for the post office. So I think the improvement in the churn is really a function of the customer type. And as we have grown and focused on the shipping customers, it’s – we just see our churn rates in that segment because of the critical nature in the everyday usage of the solutions.

[Debra Fiakas:]

Okay. Are you seeing your customers moving from one solution to the next as there are some dynamic changing within their business or is it too soon really in this new portfolio of solutions that you have got now to have seen that dynamic?

[Ken McBride:]

No, we have seen it already. I mean, I was part of the theory going into these acquisitions as that we would. As the customer goes to their lifecycle, they start off largely typically with the postal service and then we are talking more about the shipper. They began with shipping a few packages they started as an eBay seller or some other types of business. And as they continue to get larger and larger, if they are successful, they start to look at other carriers and other – their business gets more complicated, they start to have to process not just 10, but 100 packages a day. And so then they need a lot of sophisticated capabilities, they start to bring in a second or even a third carrier in order to optimize their costs and they start to need a rules engine to do some automatic application to set different things like mail class. So, we have seen customers, that was part of the theory as customers come in. They start with the Stamps.com or Endicia USPS-only solution. As they grow, we are able to retain them with an up-sell into a ShipStation or ShipWorks solution whereas before we may have lost that customer as we have already seen that happen.

[Debra Fiakas:]

Okay, excellent. And then I wanted to return to comments that you made during your opening remarks about things that you are doing to grow the company and one of them was that you want to continue to enhance your solutions and your technologies, including and I thought I heard the words, enhance, scalability and I wondered if perhaps you could describe a little bit more about what that means? Is it a matter of bringing out new versions or improvements in the existing products or do you think that you still need additional solutions in your portfolio? And then if you could just comment on what kind of customer these enhanced solutions might be targeting?

[Ken McBride:]

Sure. I think I was commenting broadly about the high volume shipping customers. And so as we continue to attract those customers, like I mentioned, we are talking about customers that are doing millions of transactions. And so these customers need faster and faster speeds, more and more solutions. They are trying to optimize, because they have a giant warehouse and they are trying to process as many packages as they possibly can, as quickly as they can to try to increase their throughput. So, we have lots and lots of those customers. So, we are successfully meeting the needs of those customers, but we continue to – like any company, we continue to strive to improve and to have our solutions go faster so that they can improve their operations. And that’s really what I was talking about in terms of further improving the scalability of the solutions. It’s just a continuous improvement process.

[Debra Fiakas:]

Alright, thank you.

[Operator:]

[Operator Instructions] At this time, I am showing no further questions. I would like to turn the call back over to Ken McBride for any closing remarks.

[Ken McBride:]

Great. Thank you so much for joining us. I appreciate it. And if you have anymore questions, you can follow up at our Investor Relations, either our phone number is 310-482-5830 or you can contact us through our website at investor.stamps.com. Thank you.

[Kyle Huebner:]

Thank you.

[Operator:]

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program. You may all disconnect. Everyone have a great day.